A recipe for trust

Have the policy errors that contributed to the global economic crisis been rectified? Sharan Burrow shares her vision for building trust and restoring confidence in the countries still suffering from the crisis.

The global economy has been on life support since 2008. Many countries are in recession, others see growth slowing, unemployment is set to rise again from already high levels, and a generation of young people is being scarred by joblessness. The robustness of democratic systems and multilateralism cannot be taken for granted–they are under pressure. These realities are not conducive to building citizen trust in the economy. The OECD’s latest response to the crisis, the creation of a new initiative called “New Approaches to Economic Challenges”, is a welcome move. The stakes could not be higher, not just for the Organisation itself but for OECD countries, and indeed the global economy.

The OECD’s origins lay in the reconstruction of Europe in the wake of the Great Depression and the Second World War. Policy failures in the 1920s and 1930s resulted in the depression that ultimately led to a global war. In the current crisis, there is no room for complacency. There is a breakdown of trust among citizens, government and business. The social contract is broken, the anger is mounting. The political response could again result in extremism and xenophobia.

Before the crisis, there were several alternative forms of market economy, with different policy frameworks, strengths and weaknesses. The trade union report Exiting from the crisis: Towards a model of more equitable and sustainable growth, published by the Trade Union Advisory Committee to the OECD, the International Trade Union Confederation and the European Trade Union Institute in 2011, was anchored in this “models of capitalism debate”. Some countries have weathered the storm better than others. Some countries and policies were more responsible for creating the storm. Some policies, long advocated by financial markets and international financial institutions, contributed to the rapid spread of the crisis around the world.

The systemic operation of global markets prior to 2008 revealed a series of imbalances in the global economy between the growth of financial markets and of the real economy, between countries with an external deficit and a surplus, between profit and capital shares in the distribution of national income, between the very top incomes and the other “99%”, and between the economic and the environmental pillars of sustainable development.

Environmental damage and scarcity of resources must be factored into production systems, so that the economy can move to zero emissions, zero waste and zero exposure to hazardous substances. New economic thinking should also help us understand how to reach full employment and decent working conditions in a resource-constrained world.

The global financial and economic crisis has invalidated the belief that indiscriminate labour market deregulation and weak labour market institutions are necessary ingredients of economic and employment success. Rather, it has proved a recipe for growing income inequality and, in some countries, the rise of precarious work. It now has a serious economic, as well as social and political, cost.

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Those countries that had achieved high employment and a more equitable distribution of incomes focused attention on the broad sweep of labour market policy, including skills formation systems before labour market entry that give workers a sense of occupational identity and selfconfidence; an emphasis on lifelong learning as a route to employability; a focus on the balance of power between capital and labour–including the strength of the trade unions and the extent of collective bargaining coverage; the pursuit of policies to narrow unjustifiable differences in treatment between groups of workers; a combination of high unemployment benefits; and job search obligations with high levels of investment in active labour market programmes to get the unemployed back to work.

Tax systems have done a weaker and weaker job of collecting necessary revenues to fund a modern state (via base erosion and profit shifting) and reducing inequality (through excessive concessions at the high end). We must examine how taxation policies can be ameliorated to improve both growth and equality. This must include a reassessment of the shift of the tax share to consumption and achieve broader taxation on property and wealth.

Beyond the role of public policy to reduce income inequality, the lessons of the crisis should call into question “light regulation” and the tolerance of imbalances that contributed to the crisis. Reducing the complexity, the lack of transparency and, in many cases, the size of the financial sector in the OECD area as a whole is necessary, through regulation, financial taxation and structural reforms. The priority is to make the financial sector serve the needs of the real economy and prevent financial speculation from damaging sustainable growth prospects.

At national level, policymakers should devote more attention to the question of innovative institutions and to the role of government through active industrial policies as sources of growth and demand generation. In a context of global value chains and production networks increasingly influencing the location of production and employment, it is also essential that OECD countries and companies achieve competitiveness on the basis of a “high road” strategy that includes respecting labour standards, raising skill levels and motivating employees.

Finally, economic performance has to be judged by wider criteria than GDP per capita, which by itself tells us little about the quality of life enjoyed by citizens. It tells us nothing about the distribution of incomes, nothing about differences between rich and poor in terms of health and life expectancy, nothing about social mobility, nothing about environmental sustainability and other issues that are crucial for the quality of life. Most importantly, it tells us nothing at all about whether most citizens have the capabilities they need to choose lives that they have reason to value.

The full burden of the economic crisis has fallen on working people. The OECD has a crucial role to play in redressing this injustice.